Should You Borrow Your Own Money?

Broken Piggy BankDoes this stat surprise you: Nearly 28% of 401(k) users currently have outstanding loans, according to a recent survey by employee-benefits consultant Aon Hewitt. That’s up from about 22% in 2005.

Yes, we get that times are tough and that a 401(k) is a tempting source of cash. After all, when borrowing, you pay yourself back, with interest; click here for details.

That, in theory, makes it better a deal than, say, racking up outrageous credit-card debt or taking an early withdrawal from your IRA, since, amongst other negatives, once that money is pulled out, you can’t put it back in. (You can still make new contributions.)

But these loans aren’t without risk. A biggie is that if you lose your job, the loan usually needs to be paid back within three months. Can’t come up with the money? You’ll owe income taxes and in many cases a 10% penalty on the balance, thus reducing your retirement stash to road-kill. (There are other potential drawbacks as well.)

A 401k loan should be viewed as a big deal, not an easy source of cash, says Sheryl Garrett, founder of the Garrett Planning Network. “Once we break that notion that this money is only for retirement, it’s tempting to think we can tap it whenever we want,” she says. But that’s a mistake.

So don’t mess with it—unless you have to.

Lend us your thoughts: Would you take out a 401(k) loan?